News

China To Become Most Influential Player In Natural Gas Markets

Jun27,2018

The unprecedented economic development of China created serious environmental problems starting in December 1978 after Deng Xiaoping’s ‘opening up policy’. The Asian country transformed from a developing nation into a powerful state, able to confront the United States in a trade war.

Pollution in the industrialized and heavily populated coastal regions has reached extremely high level, threatening the stability in the country, discrediting the mighty Communist Party. Therefore, it comes as no surprise that the government is promoting cleaner fuels and production methods.

China is the biggest investor in renewables in the world: three of the ten biggest wind turbine producers and seven of the ten biggest solar panel producers are located in China (eight if you also count Hong Kong). Also, Beijing is the biggest investor in green technologies. Until 2020 China intends to invest an additional $360 billion in its renewables energy sector, making the country the undisputed leader in this field.

Furthermore, Beijing has acknowledged the value of natural gas in offsetting its coal-fueled power plants which provide an alternative for intermittent renewables energy. In 2016 just 4 percent of the Chinese energy mix was natural gas. Due to the reduction of coal as the primary energy source and the drive for cleaner skies, Beijing intends to increase natural gas’ share to 15% of the energy mix. The IEA expects Chinese electricity consumption to rise to 3.188 GW in 2040 from 1.625 in 2016.That means an increase in gas consumption from 65 GW to 478 GW for electricity production, a whopping 735 percent increase!

Despite facing challenges during the shift to more natural gas consumption, the push for cleaner air is relentless and will continue. Traditionally Chinese homes have used coal for heating as it is an abundant and cheap energy source. The rapid shift to natural gas, size of the Chinese population, and relatively modest domestic gas resources led to a crisis in the winter period of 2017/2018. Prices of LNG on the global market increased as a consequence of China’s hunger for LNG cargoes.

Pipeline connections with major gas producing regions in Central Asia and Myanmar have made available additional volumes of natural gas. The Central Asia-China gas pipeline provides the western regions with 55 bcm and from the south, 12 bcm of gas is pumped from offshore fields on the coast of Myanmar. These projects, however, are not sufficient to cover the growth in natural gas consumption of China. Therefore, a third massive pipeline is currently under construction in the northeast.

In 2012 a historic deal was struck between Russia’s Gazprom and its Chinese counterparts. The ‘Power of Siberia’ pipeline, as it was named, will provide the heavily industrialized northeast with 38 bcm annually over 30 years for an estimated $400 billion starting in December 2019. The densely populated coastal regions, however, are better served by LNG as they are physically further away from the gas fields in the periphery of the Chinese borderland.

China already set a record in LNG imports in 2017 when it replaced South Korea as the second largest LNG importer in the world. Furthermore, it is expected that in 2021 China will even take over Japan’s position as the world’s biggest LNG importer. Currently, Japan owes its no.1 position to the lack of domestic gas resources and the disaster at the nuclear facility in Fukushima. However, China is on track to become the largest gas importer. This is even more remarkable when considering that Beijing didn’t even import gas 15 years ago.

Over the years, spot prices for Asian LNG had decreased significantly due to what many analysts called a “supply glut”. Until twelve months ago it was widely anticipated that the glut would last well into the next decade. However, the clean air policy of the Chinese government has set in motion market developments favorable to LNG producers across the globe. The insatiable appetite for natural gas in Chinese households and industry has created opportunities for the energy industry. As with oil, China stands to become the most influential player in the market with its ever-growing appetite for natural gas.